Bailouts/The Pride of Nostalgia: Chapter Previews from 'The Politics of Fear'
Bailouts
The savings and loan bailouts in 1989, the bailouts following the Great Depression, the rescue of Bear Stearns, AIG, or Lockheed Martin—each example shows the government stepping in to save private industry from failing. Saving said industries from insolvency comes at the expense of the taxpayer, as billions of dollars are used to prop up failed businesses and are added to the national debt: An insurmountable monetary tab that is owed by countless generations of future Americans.
If a private business fails due to poor business practices, is it the job of the government to save them?
Perhaps you own a business, or know someone who does. If their business were to fail it is not very likely that the US government would send them a check to continue operations—certainly not a yearly check in perpetuity to do so. So why is this the case with larger businesses?
The answer lies once again in fear; a fear of an economic hypothetical scenario and a moral implication. The hypothetical economic scenario states that if we let such a large institution fail it will harm the economy further, so it is better to artificially prop them up and worry about the bill later. The moral implication states that we mustn’t let them fail because it will harm thousands of workers and perhaps even more secondary investors. So the rhetoric surrounding government bailouts is twofold, a means to preserve the shambles of an economy and the lives of countless workers.
The truth behind these actions is far from such reason. In many cases, the economic and moral justifications listed are simple means of maintaining good public relations amidst massively corrupt acts.
To examine the true costs of government subsidization to private businesses, we must take long-term effects into account. For Lockheed Martin, an aerospace and munitions company, the first bailout was in 1971. To keep Lockheed afloat the government allocated $250 million for its continued operation. Since then government subsidies have continued to roll in for Lockheed on both the federal and state level, amounting to billions of dollars total circa 2018 (US Subsidy Tracker, 2018). Remember that the rhetoric behind this is that allowing Lockheed to fail could endanger the economy and the associated workers; therefore it is required to subsidize Lockheed’s operating capital. Yet there is another factor to this that is not considered by most.
Constant government expenditure is a hallmark of inflationary monetary policy, meaning that more US dollars must be put into circulation to pay Lockheed every year. This decreases the purchasing power of the dollar and steals economic independence from every American. The long-term effects of a constant subsidization actually assist in harming the US economy—a self-fulfilling prophecy that simply delays dealing with actual economic issues rather than stopping them. Hypothetically if the workers and investors for Lockheed Martin were bailed out in 1971, rather than the company itself, the entire populace of the US would not perpetually suffer for the poor business practices of one corporate entity.
Consider as well that Lockheed Martin uses subsidized operating capital to produce its products, which are then bought by the government using taxpayer dollars once again. In essence, this means that Lockheed Martin is paid twice for the same product. The bill is footed two times by US taxpayers, often in a no-bid contract deal with Washington.
This is only one instance of bailouts being used to privately hoard capital at the expense of the public. Would it not have made more sense to bail out the affected individuals for a finite amount in 1971 instead of a limitless subsidy continuing forty years later?
Relating back to “What We Don’t Understand” in Chapter 2, government bailouts hinge upon a general lack of economic education amongst the public. When the economy is under duress most people don’t understand why. It becomes the job of government experts and pundits to solve the issue—many of whom are former corporate lawyers and lobbyists, investors in major corporations, or ignorant to inflationary dangers themselves. The moral hazard is obvious to see here. If a senator receives donations from Lockheed Martin every election season they will not want to see Lockheed fail. To this senator it would make more sense to subsidize Lockheed in perpetuity rather than address the issue at hand and formulate a finite solution.
When it comes to crunching numbers and the advanced economic implications of something like this, average taxpayers may feel out of their depth. This is well understood with many large companies who may then intentionally run poor business models, knowing full well that their failure will be backed by the faith of the federal government.
In 2008 a financial meltdown brought global commerce to its knees. The reason for such a massive and destructive recession is hidden in a plan to become rich off of asset commissions, allowing large businesses to fail, and reaping the benefits of assured government subsidies.
The story goes as follows:
Pretend for a moment that you are a college student in 2005. You have secured a loan to go to college, to the tune of $80,000. Your bank loaned you the money; therefore said capital is no longer in the bank’s reserves. The debt you owe is on a ledger at the bank, along with countless other debts. Car loans, housing loans, and debt consolidation loans are all stored here. The bank decides they wish to make money off of your debt somehow, and due to lax government regulations they come up with an idea.
What if they could take that ledger of everyone’s loans and total it all up into one massive debt pool, divide the debt pool into thousands of tiny debt chunks, and then resell this debt to other investors? The way they would do this is by saying that if an investor bought a debt chunk they would get X amount of interest upon its maturity. So the bank sells these debts to an army of third-party individuals, normal investors and citizens. When you first got your student loan a banker got a commission. When someone else bought a debt chunk a banker got a commission. There are significant problems with this model.
One is that you didn’t have to have collateral for your loan. The government got rid of regulations that prevent the bank from lending to you despite this reality, and you will have no realistic way to pay off your student debt. Because of this there is no way to pay X interest to the third-party debt-chunk investors, and the bank has lent out far more money than it actually has in reserves (re: fractional reserve banking). Now there is a ticking time bomb set for detonation. Soon so many debtors like yourself will default that it will bankrupt the loan houses and the third-party investors. When this eventually did happen in 2008 it literally stopped large-scale global trade for several minutes, forcing the hand of the American government to bail out dozens of major institutions.
The primary issue here is that bankers, economists, and politicians are not so blind that they couldn’t see this coming. This is basic cause and effect in economics, an event that was surely well known to larger banks that have been in operation for a hundred years or more. It would seem, conjecturally, that these groups knew that such practices were insolvent. Perhaps many committed to them anyway because they were aware that commissions could be privately pocketed and the company would be bailed out by the United States government.
Such conjecture is supplemented by the presence of ex-officials from AIG, Goldman Sachs, Bear Stearns, and many more in political positions. The total cost of the bailout, minus subsidies going forward, would be $700 billion.
Revisiting the above-stated question: Would it have been more effective to bail out debtors and investors while allowing the banks to fail?
I understand such a question is hard to quantify, even harder to stomach. The sheer scale of such a question is scary; it invokes fear. There was little time to get the economy moving again, the Emergency Economic Stabilization Act had to be put in place quickly, or risk an even worse recession. The dire nature of this situation preyed directly upon fear for motivation, fast action above prudent action, and a dismissal of responsibility for the parties at fault. Even as described above, it is hard to make sense of the events leading to 2008. The muddy and unclear nature of these debt chunks being sold were part of their appeal to the banks selling them, keeping consumers in the dark until it was far too late.
Bailouts and subsidies are meant to provide a social bottom line for a civilization. They are meant to be a last resort to prevent utter economic destruction, and if abused have the power to undo the threads of long-term economic stability. Because economic destruction is something very real and very scary, it can be easy for corrupt entities to cry wolf, extending a greedy hand to their governments year after year and never intending to resolve their broken practices.
The Pride of Nostalgia
The 2016 US presidential election was a duel of extremes. As the United States has faced mounting national debt, many international wars, and questionable domestic policies, citizens have been divided into two camps: one largely embracing democratic socialist policies such as universal healthcare, and the other drifting toward the right-wing politics embodied by Donald Trump. In Trump’s campaign for the presidency, the words “Make America Great Again” became a household phrase, regardless of individual feelings toward or against Trump’s policies. Since his presidential tenure, dissidents toward Donald Trump often reflect upon the Obama presidency as their own “Great America,” daydreaming about days past when the nation seemed more to their liking.
Nostalgia is a dangerous condition. It is preferential, selective, and biased in its reasoning. It is often a psychological crutch, meant to give some sort of foundation from our past in the midst of an unsure present. Relating to the Trump and Obama dichotomy, let’s evaluate immigration once more. Trump’s rhetoric on immigration is disastrous to say the least. Despite a decade long decline in illegal immigration detailed by the PEW Research Center and US Census Data (2018) his administration has placed countless families and unaccompanied children in government camps, presided over the longest government shutdown in history for the construction of a border wall, and deported an egregious amount of citizens and immigrants alike. Yet the infrastructures and precedents for these actions were laid in place by Obama—including a 3,600 percent expansion of ICE, a deportation of nearly two million people, and thriving anti-immigrant rhetoric via the continued imputative empowerment of the Department of Homeland Security. In terms of immigration, Trump supporters were very much in line with Obama’s policies and vice versa. This illustrates well how nostalgia can remove realistic notions of our past, substituting it with idealistic fables.
I do not, however, intend to dedicate this chapter to either of these presidents. Instead, I intend to dedicate this chapter to the dangers of looking back with starry eyes to a past that did not exist.
After the Great Depression an economist named John Maynard Keynes became well known for his analysis of the causes of unemployment, and ultimately, for the Depression itself. Keynes had many interesting ideas regarding economic theory, and very likely these ideas helped immensely in the post-Depression recovery. But these ideas, though still emboldened after 2008, have become fragile and without function. The nostalgia toward Keynesian economics has become dangerous, as his teachings have become stale. Examining further, Keynes offered two remedies to the sluggish US economy in the 1930s. One was that government spending could assist in promoting employment, an essential shot of monetary adrenaline into the job market. But this came at a price which details the second stipulation. This would be that monetary inflation had to be allowed—more money had to be printed and distributed to assist in this spending plan. This meant that as more money could be injected into the economy its worth would be lowered, as is the traditional effect of inflationary policy.
But Keynesian economics worked well in the 1930s, mainly because of what the government spent this extra inflationary money on. While some of these funds were meant simply for economic relief to US citizens, much of it would be delegated to organizing public works and transportation. Namely the Lincoln Tunnel in New York (one of the busiest tunnels in the world), the Overseas Highway from Miami to Key West, the Great Smoky Mountain National Park, the Hoover Dam, the Blue Ridge Parkway, and LaGuardia Airport were made into priorities. The reason for this was that such investments could not only facilitate workers’ commutes in the future, but also in many cases encouraged tourism and recreational spending. Airports, highways, and national parks would prove to be key in the future recovery of the US economy, while in the short term workers could be hired during the Depression to construct such things. Short-term goals were accompanied by realistic long-term goals, which came to fruition relatively quickly. This didn’t solve the Depression entirely though, as wartime industry during World War II ultimately brought the American standard of living back to its 1920s glory.
In the case of the Depression, Keynesian economics helped. It even helped to inspire the 1956 commission of the interstate system by Dwight Eisenhower, which yielded similar economic boons. However, the revival of these ideas in the early 2000s has proven to be a disaster.
Economists and government officials fell upon their nostalgia for Keynes during the boom and bust cycles of the late twentieth century. These included the savings and loans bubble of the 1980s, the tech bubble of the 1990s, and the housing bubble of 2008. The resulting monetary injections from the government, and subsequent inflationary demands, found little substance in truly reviving the economy from these pitfalls. Instead they simply shocked the country back to life, in a Frankensteinian condition that would collapse back upon itself every decade or so.
For some perspective: The Savings and Loans bailouts cost taxpayers nearly $132 billion, and the tech bubble actually helped pave the way for the 2008 housing loan crisis by prompting the Federal Reserve to slash interest rates and deregulate asset sales. The housing bubble cost taxpayers approximately $700 billion. The US government then tried Keynesian stimulus initiatives to kick-start the economy, referencing the success of the Keynes method in the Depression. Though rather than investing in infrastructure and tourism, these funds have largely gone to an expansion of the defense sector, DHS, ICE, and various nationalized industries. While this is generalized as a statement, it issues a very relevant observation. These stimulus packages don’t embellish the private sector or middle class the way the reforms of the 1930s or 1956 traditionally did. Instead they simply allowed for a further inflation of federal powers and centralized economic dependence in the private sector, while permitting failed businesses to continue their poor conduct. The nostalgia toward the old Keynesian model has ultimately perpetuated a stagnant mindset among economists and government officials, making the boom-bust cycles witnessed in the past thirty years a commonplace event.
Furthermore, upon evaluating American nostalgia, there is an ever-present, lingering question: When exactly was the period of time when this romantic and “great” America was a reality? Perhaps this can be found by examining the greatest hallmark of American rhetoric. The concept of democracy has been rogue in comparison to the old archetypes of monarchy and empire. It is a foundational ideal that reinforces the ideals of American greatness, but is tragically filled with double standards and flaws.
Consider that American blacks could not vote until 1870. Women could not vote until 1920. Native Americans were suspended from their democratic rights until 1962. Even today many Natives face state laws that make it difficult to vote. So let’s say conservatively that the United States fell short of its “great” ideals until 1962. This gets pushed back even further by Jim Crow laws that were in effect until 1965. Following this the War on Drugs began in 1971, an initiative that feeds upon the incarceration of nonviolent individuals and often bars people from their ability to vote. Private prison industries and firms that profit off of prison labor were ultimately the benefactors of these laws, while rehabilitation was looked over in favor of criminal prosecution. Not coincidentally these laws were effective in antagonizing the middle and lower classes while omitting prison time for affluent offenders.
Even progressives like president Bill Clinton paid homage to this dark directive with the Three Strikes and You’re Out ruling, where judges are stripped of their own ability to evaluate offenders on a case-by-case basis. Hanging on that point for a moment, the three strikes rule supposedly applies to violent offenders but could just as easily apply in the scenario below:
Perhaps a high school student gets caught with a cannabis cigarette at age eighteen and is arrested: strike one. A few years later they are caught stealing a pair of shoes from the mall and push a clerk to the side as they run out of the store: strike two. Ten years pass with no further offenses. But one day this person is in a bar and gets into an altercation, a few punches are thrown and charges are pressed: strike three. Our hypothetical person can now be sent to jail for life. No questions asked. Now some of these offenses are, of course, serious. But they are hardly the crime of the century; in fact, they are fairly commonplace and relatively minor compared to murder or rape. Yet a series of singular and somewhat minor offenses have condemned a person to life in prison, and ultimately a servitude to the industry of incarceration.
On the foreign relations front the US has had a continually questionable track record. The greatest American foes have often been invented. Consider the Afghan Taliban, who were endorsed and elevated by Jimmy Carter and Ronald Reagan. Meant to limit Soviet influence in Afghanistan, these presidents knew that the Mujahideen were religious fundamentalists—but still gave billions of dollars in aid and training to them. As the Soviet bloc waned, the Taliban morphed into existence, a direct evolution of the mujahideen fighters. The US was complicit with their authoritarian rule until 2001, when the Taliban outlawed the production of poppy. This would have been a devastating blow to the industry of opioids. The US would invade later the same year.
None of these factors begin to address the problem of police brutality in the US, whose mortality statistics that are the fifth highest in the world (“2018 Police Shooting Database,” Washington Post . January 3, 2019). They do not address the US healthcare system, which is ranked dead last in the top eleven developed nations (2014 Commonwealth Fund Survey, 2014). In education the US also has a troubling placement, ranking fourteenth in the top twenty developed global countries. In literacy the US ranks twenty-fourth, in education expenditure it is fifty-fourth, and in human development, twelfth (2008 United Nations, Ranking America). These indicators elicit the question of if American nostalgia is truly a worthwhile platform, as such notions openly dismiss such egregious statistics. As one of the most influential and affluent nations in the world the United States falls short of its advertised mantle, and nostalgia for some sort of long-lost past doesn’t allow for the reformation, and indeed dismantling, of failed social or political systems.
Even in terms of the “progressive” Democratic party, we are faced with the endless wars, drone strikes, bailouts, and regressive social policies seen under Barack Obama, that are conveniently forgotten in lieu of his ostentatious predecessor, Donald Trump. In the words of author and Sydney Peace Prize winner Arundhati Roy:
People spend so much time mocking Trump or waiting for him to be impeached. And the danger with that kind of obsession with a single person is that you don’t see the system that produced him.
This quote embodies the stagnation that is produced by nostalgia. By condemning Trump’s stance on immigration while sanctioning the same rhetoric from Obama’s administration (listed at the beginning of this chapter) constituents effectively do nothing to curb xenophobia, racism, and the expansion of domestic authoritarianism. The system that has produced late-stage capitalism is a key component to the effects of what we see now: a desperate clinging to falsified ideals, narratives, and a past that very well may have never existed.